Value investors make hardheaded assessments of their competencies. If they doubt their skill in stock selection, they steer clear. Value investors know their limits, thickly drawing the boundaries of their circle of competence. They avoid investment prospects beyond those boundaries as well as anything even close to the boundaries.
Market gyrations, price-value discrepancies, and risks of overconfidence warrant exercising extraordinary caution in selecting an investment. In focusing on the business, value investors ascertain whether the business itself is substantially insulated from adversity. Value investors avoid business with permanent problems. The business itself must be fortified by a moat, a defensive barrier to ill effects such as arise from brand name ubiquity, staple products, market strength, and adequate research and development resources. Franchise value is exhibited by high, sustainable returns on equity and invested capital.